Eurasian Journal of Business and Economics, 14(27), 29-46, (2021).

Impact of COVID-19 on Stock Market and Gold Returns in India

Sarika MAHAJAN , Priya MAHAJAN"

Received: September 6, 2020

Abstract

Revised: April 4, 2021 Accepted: May 5, 2021

The spread of COVID-19 has caused severe damage to human Ilves and the global
economy. The stock
markets around the world have plummeted to their lowest levels since the 2008
Global Financial
Crisis. This paper attempts to examine the joint dynamics of gold and stock market
returns during
unprecedented times of health and financial shock due to COVID-y9 between January
2020 and May 2020
using granger test, ARMA model, and symmetric and asymmetric GARCH models to
improve the
understandlng of the mlcrostructure of investment scenario in Indla. The period
considered in the
study helps to evaluate the impact of lockdown due to coronavirus on Gold and Nifty
index return.
Results based on GARCH and E-GARCH models indicate a significant negative impact of
gold on nifty
returns during the sample period. The results also indicate investors' perception
of gold as a
safe-haven asset durlng periods of elevated uncertainty. Thus, the study is
expected to enhance the
understanding of market asymmetry, the behavior of Investors towards these avenues
of investments,
and Information processing.
Keywords: COVID-19, Lockdown, Stock market return, Volatllity, Gold, Information
asymmetry
JEL Code Classifications: G11, G15 UDC: 338.31
OO/: https://doi.org/10.17015/ejbe.2021.027.02.

'Assistant Professor, Jamnalal Bajaj Institute of Management Studies, University of

Mumbai, India,
Email: sarikamahaian4ibims.edu
”Assistant Professor, Department of Commerce, Uttarakhand Open University,
Haldwani-India, Email:
pmahaian@uou.ac.in
Copyright @, 2021 AIa-Too International University.

Sarika MAHAJAN & Priya MAHAJAN

1. Introduction
The novel coronavirus (COVID-19), which emerged in Wuhan City, Hubei Province of
China, spread to
other countries over time and was declared a global epidemic by the World Health
Organization (WHO)
on March 11, 2020. The COVID-19 outbreak is an international pandemic that has
taken the world by
storm (Yan et al., 2020). The coronavirus has affected 219 countries and
territories around the
world (WHO, 2020). As per the World Bank's latest assessment, the global economy
might hit the
worst recession since the Great Depression in the 1930s. COVID - 19 has impacted
all financial
markets worldwide; particularly, the share prices trend dropped significantly and
continuously
(Sansa, 2020). India is also no exception to this. With the pandemic, curfews were
imposed,
workplaces closed, production decreased, shopping stopped, except for basic
supplies. WHO (2020)
declared that as of May 01, 2020, the total number of confirmed global cases of
COVID-19 reached
3,175,207, whereas the total number of deaths was 224,172 (Celebioglu, 2020).
COVID-19 endangered
human health as well as increased risk perception in financial markets. Large
decreases occurred in
stock markets in a short time, companies lost value, and stock prices dropped.
India came to terms with Corona Pandemic almost at the end of February, and soon
the Stock market
bore the brunt of the massive scare that COVID-19 posed, and a big crash ensued,
which led to a
loss of Rs. 5.3 lakh crores erosion of wealth (Anonymous, 2021). Historically
making sense of the
market fall, a 3.5 % fall in the market earned it the distinction of being the
second-largest fall
in the history of the Sensex. With a slight recovery happening on March 02, the
markets eventually
ended in the red. A week later, on March 09, the markets again saw huge losses by
falling over 1900
points in a single intraday session. These Stock market crashes are not new and
have happened
earlier in the century as well, and during that time, it was gold that turned out
to be a saving
grace for most investors (Baur & Lucey, 2010; Baur & McDermott, 2016; Bouri et al.,
2020; Ciner et
al., 2010; Ji et al., 2020; Reboredo, 2013)
In the entire world, it does not matter in which country we live or in which
country we go; the
importance of gold is the same all over the world. When the world economy was hit
by the Dotcom
Bubble in the year 2000 and during the financial crisis of 2008, it was the
investments in gold
that performed extremely well during those crises. After the global recession,
international gold
prices have risen in the last few years, resulting in an accelerated spurt in the
gold prices in
India (Shiva & Sethi, 2015). But the current situation due to COVID-19 is much
bleaker than a
previous global financial crisis. Various studies supported that gold emerged as a
safe haven or a
hedge in times of market turmoil (Baek, 2019; Pullenet al., 2014; Smirnova, 2016;
Le & Chang,
2011). The safe-haven can broadly be defined as an asset that protects the
investor's wealth
against market turmoil.
The research of Oxford Economics stated that gold generally does well in the period
of deflation.
Deflation is when interest rates are low, consumption is going down,

Page | 30 EJBE 2021, 14(27)

Impact of COVID-19 on Stock Market and Gold Returns in India

and there is financial stress in the economy (Rani & Sharma, 2020). The literature
stated that in
times of financial crises or financial shocks, gold emerged as an alternative
investment asset or
an important part of assets in financial portfolios. But in the context of the
current pandemic
(COVID-19) situation in the country, the study of the relationship between gold
prices and the
stock market index of an emerging economy like India becomes very interesting. The
interest in gold
in times of crisis perhaps stems from its historical use as a medium of exchange
and standard of
value and its stable purchasing power overtimes. Based on this, the current paper
attempts to study
the joint dynamics of gold and stock market returns during unprecedented times of
health and
financial shock due to COVID-19 to improve the understanding of the microstructure
of the
investment scenario in India. The current study tests the following hypothesis
using GARCH and
EGARCH models (H0): "Lockdown due to coronavirus had no significant impact on the
Indian stock
market volatility."
Therefore, the current study investigates the gold and stock market returns
relationship in India
using the granger test, the ARMA model, and the symmetric and asymmetric GARCH
models. The current
study further contributes to the literature because it examines the impact of
lockdown due to
COVID-19 on the Indian stock market.
The remainder of the paper is as follows. Section two reviews the literature. In
section three, the
methodology and data employed are presented. In section four, the key results from
the empirical
investigation are reported, and in section five, conclusions are drawn.
2. Review of Literature
Many studies have been done to investigate the relationship between gold prices and
stock indices.
Sreekanth and Veni (2014) studied the causal relationship between gold prices and
S&P CNX NIFTY.
The data has been taken from 2005 to 2013 for study by using econometric tools like
augmented
Dickey-Fuller (ADF) test, Johansen co-integration test, VECM, Wald's coefficient
diagnosis,
residual analysis, and Granger causality test (GCT). The results showed the
existence of long-run
co- integration between the gold prices and NIFTY. The gold prices and NIFTY were
found to be in
equilibrium in the short run and long run, and it was found that the gold prices
are sufficient to
explain the movements of S&P CNX NIFTY in the short run as well as long run. The
GCT confirmed the
long-run causality flowing from gold prices to NIFTY.
Gayathri and Dhanabhakyam (2014) tested the causal nexus between the gold prices
and Nifty in India
for ten years (i.e., 2003-2013). The co-integration test confirmed that there is a
co-integration
between gold prices and Nifty returns. The GCT confirmed the unidirectional
relationship between
gold prices and Nifty. When the gold prices of gold change, there is also a change
in the stock
market indicator NSE Nifty. The studies of Ray (2013), Hemavathy and Gurusamy
(2016), Srivastva and
Babu (2016), and Patel (2013) also stated that there is co-integration between gold

EJBE 2021, 14(27) Page 131

Sarika MAHAJAN & Priya MAHAJAN

prices and Nifty and also unidirectional relationship exist between gold prices and
nifty.
On the contrary, the results of Verma and Dhiman (2020) stated that there is no
causal relationship
between gold prices and Sensex. Granger Causality tests have been applied to study
the relationship
between gold prices, Sensex, and ETFs. Although there is no causal relationship
between gold and
Sensex, Gold ETFs are largely affected by the spot price movements of gold. It
means the gold
prices can help to forecast the daily returns of the maximum gold ETFs under study.
Narang and Singh (2012), based on ten years of data (i.e., 2002-2012), analyzed
that there is no
long-term co-integration between gold and Sensex, and also no causal nexus exists
between gold and
Sensex. Mishra (2014) studied the dynamics of the relationship between gold prices
and capital
market movements from 1978-79 to 2010-2011. The tools like Toda and Yamomota
granger non-causality
test reported bidirectional causality between gold prices and the BSE 30 Index. It
means that both
the variables contain some significant information that causes each other.
Some studies also studied the relationship of gold prices with multiple stock
indices and other
macro-economic variables like the exchange rate of a country's currency, interest
rate, inflation
rate to examine the relationship among variables. Shiva and Sethi (2015) examined
the economic
relationship among gold prices, Sensex, Nifty, and exchange rates in India. The
monthly data of 15
years period ranging from 1998 to 2014 of the given variables has been studied by
applying the
econometric tools like Dickey-Fuller Test, Johansen Co-integration test, Wald's co-
efficient test,
Granger Causality test (GCT). The results stated that there is long-term co-
integration among the
variables under study. The GCT confirmed the presence of unidirectional causality
from gold prices
to stock prices and also from gold prices to the USD/INR exchange rate of India.
The major
implication of the gold market on the Indian economy is that it serves as a type of
insurance
against extreme movements in the value of traditional assets during an unstable
financial market.
Baek (2019) studied the relationship between gold, bond, and the stock market.
Johanson
co-integration test is applied on past 10-year data of U.S Market to re-
investigate how gold
market interacts with the stock market and bond market. The result stated that
there is no
co-integration between gold returns, bond returns, and market returns. Further
Granger causality
test is applied, and it stated while there is no co-integration between gold, bond,
and market but
gold returns have a unidirectional causality with both bond and market returns.
Also, it was
discovered in the study that gold returns have some predictive power on subsequent
short-term stock
returns. Under extreme market scenarios, it turns out that gold returns tend to
deteriorate more
simultaneously with bond returns than stock returns. This means that gold can
better serve as a
safe haven for stock in a relative sense during temporary market downturns.

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Impact of COVID-19 on Stock Market and Gold Returns in India

Bhunia (2013) studied the dynamic relationship between crude oil prices, exchange
rates, gold
prices, and stock price indices of BSE and NSE. Daily data of 20 years from 1991 to
2012 of the
given variables have been studied by applying the econometric tools, include the
Augmented
Dickey-Fuller test, Johansen Co-integration test, Granger Causality Test. The Co-
integration test
assured the long-term relationship among the selected variables. Further, the
results of GCT
reported bi-directional causality between gold prices and Nifty, Sensex and gold
price, Exchange
rate and gold price, Sensex and Nifty. Emmrich and McGroarty (2013) studied the 30
years data
sub-divided into the 1980s,1990s, and 2000s of equities, bonds, and various gold
instruments
included the Gold ETFs entered in the market in 2005. The data of 2000 is further
subdivided into
the pre-crisis period (financial crisis of 2007) and post- crisis period. The
results stated that
the 1980s and 1990s have suggested avoiding gold investing completely. However,
data from the 2000s
once again provides evidence for including some gold in investment portfolios. The
analysis shows
that the case for gold investing has become especially strong since the financial
crisis in 2007.
The research finds that gold bullion almost always produces better portfolio risk-
adjusted returns
than alternative forms of gold investment.
Bakhsh and Khan (2019) studied the relationship among the variables, i.e., gold
prices, crude oil,
exchange rate, and stock index of Pakistan, by utilizing the time series data from
1997 to 2018.
Statistical techniques like the Dickey-Fuller test, correlation test, Co-
integration technique,
Granger test have been applied. The results indicated that there is no long-term
co-integration
among the variables. Whereas stock index and gold prices are highly correlated, but
no causal
relationship exists between gold and stock index. The results also demonstrate the
significant
effect of crude oil price & gold price on the exchange rate.
While the current literature relating the COVID-19 pandemic to financial markets is
limited, the
existing studies have provided some very interesting results. For example, Corbet
et al. (2020)
reveal a negative knock-on impact from the coronavirus on some companies with
similar names. Also,
Akhtaruzzaman et al. (2020) show that listed firms across China and G7 countries
have experienced
significant increases in the conditional correlations for the market returns. This
fact is
confirmed by Okorie and Lin (2021), which found considerable fractal contagion on
the market return
and market volatility. Moreover, Conlon and McGee (2020) and Goodell and Goutte
(2021) suggest that
cryptocurrencies do not act like safe havens during COVID-19 turmoil.
In a nutshell, based on the above-mentioned studies, it can be stated that little
efforts have been
made at the international level to evaluate the impact of coronavirus on the stock
market and gold
return movements, whereas, in India, this relationship has not been well
investigated. Therefore,
the current study attempts to fill this gap and sheds light on the informational
efficiency of the
Indian stock market. It contributes to the literature by investigating the gold and
stock market
relationship during lockdown due to coronavirus news in India.

EJBE 2021, 14(27) Page 133

Sarika MAHAJAN & Priya MAHAJAN

This paper examines the relationship between Gold and Nifty index return in a
contemporaneous and
dynamic context in the Indian stock market and contributes to the literature in
several respects.
Firstly, it deploys the granger causality test to investigate information flow
between the
variables along with the ARMA model. Also, we use the GARCH models in the study of
the
return-volume relationship to examine volatility persistence. This study further
checks the
information asymmetry with EGARCH (1,1) model.
Moreover, the ongoing COVID-19 outbreak represents an interesting period to include
in our sample
because coronavirus lockdowns were initiated throughout the world, increasing the
fear of economic
loss and stimulating the demand for gold as a safe-haven asset. The period
considered in the study
helps to evaluate the impact of lockdown due to coronavirus on Gold and Nifty index
return. Thus,
the study is expected to enhance the understanding of market asymmetry, the
behavior of investors
towards these avenues of investments, and information processing.
3. Data Base and Research Methodology
To investigate the impact exerted by lockdown due to COVID-19 on gold and stock
market return, the
daily data for gold prices and Nifty closing prices during January 2020 and May
2020 starting from
1/02/2020 to 5/29/2020, have been used in this study. Data has been taken from
Bloomberg and
verified against data available on NSE and Gold Price India websites. Analysis of
data is done
using Augmented Dickey- Fuller (ADF) Test, Correlation test, GARCH (1,1) model, and
Bi-variate
Granger causality test with the aid of E-Views 8 Software.
3.1. Methodology
Two main latent variables for this study are the stock market return and gold
return. The daily
stock returns are continuous rates of return, computed as a log of the ratio of the
present day's
price to the previous day's price (i.e., Rt = In (Pt /Pt-1)). Data are obtained
from the website of
NSE (www.nseindia.com).
Given the nature of time-series data, it is necessary to test the stationarity of
each series. One
way to test for the existence of unit roots and determine the degree of
differencing necessary to
induce stationarity is to apply the Augmented Dickey-Fuller (ADF) tests. It
consists of regressing
the first difference of the series against a constant; the series lagged one
period, the
differenced series at n lag lengths, and a time trend (Pindyck & Rubinfeld, 1998).
The model used
is as follows:
brt —— a + /=i ii ^t—I + *t ”P^t— +ct (1)
Where t is the trend variable, taking values of 1, 2, and so on. Prt-1 is the one
period lagged
value of the variable r. If the coefficient of p is significantly different from
zero, then the
hypothesis that r is non-stationary is rejected. Unit root test is done with E-
views Software, and
results are discussed in Table 2.

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Impact of COVID-19 on Stock Market and Gold Returns in India

It is now a well-known fact that financial return series exhibit strong conditional
time-varying
volatility, volatility clustering, and volatility persistence. Researchers have
introduced various
models to explain and predict these patterns in volatility. The most successful
empirical workhorse
for modeling this characteristic of financial time series is Engle's (1982)
Autoregressive
Conditional Heteroscedasticity (ARCH) model and its extension, the Generalized
Autoregressive
Conditional Heteroscedasticity (GARCH) model of Bollerslev (1986). Therefore, this
study also used
this test with E-views Software while analyzing the impact of the global financial
crisis on stock
return as well as the volatility of the Indian stock market.
Based on the above logic, the study employs GARCH (1,1) as a benchmark model to
measure the
persistence of return volatility. The specifications of the GARCH model are
presented below:
Equation (2) specifies the conditional mean equation of the GARCH (1,1) model.
**t —— • •- â^t •- •‹ (2)
^t —— = + Z‹——1 ²
Equation (2) contains a regress and Rt, in the current study, it is stock return,
which depends ona
stands for drift term, Xt is/are exogenous variable(s), and § is/are
coefficient(s) of respective
exogenous variable(s). Like other econometric models, ct is an error term and
subscription; this is
denoted for time series data. This equation is generally called the conditional
mean equation and
is the foremost step for empirical analysis.
Equation (3) is called conditional variance equation, where ht is the conditional
volatility, oi is
the coefficient of ARCH term with the order i to m, and §j is the coefficient of
GARCH term with
order j ton. The conditional volatility as defined in equation (3) is determined by
three effects,
namely the intercept term given by uJ, the ARCH term expressed by oiE2t-i, and the
forecasted
volatility from the previous period called GARCH component expressed by §jht-j.
Parameters w anda
should be higher than 0, and § should be positive to ensure conditional variance ht
to be non-
negative. Besides this, it is necessary that oi+§j<1, which secures covariance
stationarity of
conditional variance. A straightforward interpretation of the estimated
coefficients in equation
(3) is that the constant term is the long-term average volatility, whereas oi and
§j represent how
volatility is affected by current and past information, respectively. Moreover, the
size
(magnitude) of parameters oi and §j determine the short-run dynamics of the
resulting volatility
time series. Large
§j shows that information shocks to conditional variance take a longer time to die
out; thus,
volatility persists for longer periods. A large GARCH error coefficient indicates
that volatility
reacts quite intensely to market movements.
To ascertain the impact of lockdown due to coronavirus on the Indian stock market
return
volatility, we have run a GARCH (1,1) estimation using a dummy variable in the
variance equation. A
dummy variable (Dt) takes a value of 1 for the daily returns
EJBE 2021, 14(27) Page 135

Sarika MAHAJAN & Priya MAHAJAN

of March 21, 2020 to May 29, 2020 defined as lockdown period otherwise 0. If the
coefficient of the
dummy is statistically significant, then the lockdown due to coronavirus has an
impact on the stock
market volatility. A significant positive co- efficient would indicate an increase
in volatility; a
significant negative co-efficient would indicate a decrease in volatility.
Also, other diagnostic tests are also considered to finalize the model for
empirical analysis.
Finally, the following mean and modified variance equation depicting the influence
of lockdown due
to pandemic are as follows:
R —— a -F zt
^t —— = + Z:——1 ²
Conditional variance equation 5 contains dummy variable (Dt) of lockdown due to
pandemic to
ascertain its effect on the stock market volatility in India.
However, the results based upon GARCH (1,1) may again be doubtful because it does
not take into
account asymmetry and non-linearity in the conditional variance. Thus, it would be
more appropriate
to apply the asymmetric GARCH model. Engle and Ng (1993) developed an asymmetric
GARCH model, which
allows for asymmetric shocks to volatility. Thus, among the specifications, which
allow for
asymmetric shocks to volatility, we estimate the EGARCH (1,1) or exponential GARCH
(1,1) model,
which was proposed by Nelson (1991), and results are reported in Table 10.

(6)

In this model specification, y2 is the ARCH term that measures the effect of news
about volatility
from the previous period on current period volatility. y3 measures the leverage
effect. Ideally, y3
is expected to be negative, implying that bad news has a bigger impact on
volatility than the good
news of the same magnitude. A positive y4 indicates volatility clustering implying
that positive
stock price changes are associated with further positive changes and vice-versa.
The parameter y5
or C7 (see table 10) measures the impact of volume on volatility.
4. Data Analysis and Empirical Findings
This paper begins the empirical analysis by first presenting the descriptive
statistics of price
and return series of Gold spot and NIFTY to check the normality of series. Table 1
provides the
sample descriptive statistics, which provides important information regarding the
behavior of
Indian stock market return and gold returns during ongoing COVID-19 health and
financial turmoil.
The data employed in this study comprise daily closing spot prices for gold and
nifty index. For
both price series, the natural logarithms are taken, and each return series is
calculated as
follows: rt / {In(yt) In(yt1)} 100, where yt is the gold price or the Nifty index.
As illustrated
in Figure 1, gold price was almost monotonically increasing except for some short-
term declines
during the sample period; consequently, the

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Impact of COVID-19 on Stock Market and Gold Returns in India

mean gold return is positive (0.001). This graph also indicates that non-normality
exists in the
series as confirmed from statistical analysis, and inertia of volatility clustering
also prevails
in the markets. Table 1 reports the descriptive statistics of the price and returns
on gold and the
Nifty index.

Nifty Index
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1-Jan-20 1-Feb-20 1-Mar-20 1-Apr-20 1-May-20

Gold Spot Price

60,000
50,000
40,000
30,000
20,000
10,000

1-Jan-20 1-Feb-20 1-Mar-20 1-Apr-20 1-May-20

Figure 1. Gold price and the Nifty index

The current study presents an analysis of descriptive statistics in Table 1 for the
price and
returns series of gold spot and nifty index, where price denoted Pt, and returns,
denoted Rt, for
the sample. The gold price series show positive skewness coefficients, indicating a
right-skewed
distribution, while the return series of gold and nifty index demonstrates a
negative skewness
coefficient with a left-skewed distribution. Furthermore, a leptokurtic
distribution can be deduced
from the excess kurtosis values for the prices and returns of the two series.
While the mean Nifty index return is negative (0.001), it is essentially zero and
more volatile
than the gold market (the SD is 0.014 for the gold return and 0.028 for the Nifty
index return). In
this sense, gold is a safer asset class relative to stocks during this
unprecedented time of
COVID-19, which has created health and economic shock for the economy. Kurtosis
exhibits a
leptokurtic distribution. As clearly shown by the Jarque— Bera test statistic and
its p-value, the
price and return series of both the gold and Nifty index return are not normal at
the 1%
significance level.

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Sarika MAHAJAN & Priya MAHAJAN

Table 1. Descriptive Statistics

NIFTY_PRICES GOLD PRICES GOLD_RETURNS NIFTY_RETURNS Mean 10442.03
42657.11
0.001844 -0.001989
Median 9955.200 42009.00 0.001108 -0.001229
Maximum 12362.30 48600.00 0.053336 0.087632
Minimum 7610.250 38977.00 -0.047325 -0.129805
Std. Dev. 1537.566 2587.914 0.014030 0.028508
Skewness -0.028588 0.629270 -0.013115 -0.873919
Kurtosis 1.322284 2.174339 5.703552 7.575974
Jarque-Bera 11.85908 9.534559 30.45784 99.97699
Probability 0.002660 0.008503 0.000000 0.000000
The ADF test results have been exhibited in Tables 2 and Table 3 for return level
data or the first
differenced price series of gold and nifty, respectively. Entire calculations are
made in Schwarz
information criteria (SIC) with the maximum lag length (MAXLAG) criteria of 12 lags
in Tables 2 and
3. It is found that gold returns and nifty returns series are stationary with p-
values of 0.0000,
and therefore, the data are fit enough to apply Granger causality, VAR, and other
tests. In other
words, the return series have no unit-roots. Hence, the level form of returns will
be used for
further estimation throughout the analysis, not the price series of gold and Nifty
index.
Table 2. Stationarity Test for Unit Root for Nifty Returns
Null Hypothesis: NIFTY_RETURNS has a unit root Exogenous: Constant
Lag Length: O (Automatic - based on SIC, maxIag=12)

Augmented Dickey-Fuller test statistic

Test critical values: 1% level
5% level
10% level
*MacKinnon (1996) one-sided p-values.
t-Statistic
-11.78955
-3.497727
-2.890926
-2.582514
Prob.* 0.0001

Table 3. Stationarity Test for Unit Root for Gold Returns

Null Hypothesis: GOLD_RETURNS has a unit root Exogenous: Constant
Lag Length: O (Automatic - based on SIC, maxIag=12)

Augmented Dickey-Fuller test statistic Test critical values: 1% level

5% level
10% level
*MacKinnon (1996) one-sided p-values.

Page | 38
t-Statistic
-8.993060
-3.497727
-2.890926
-2.582514
Prob.* 0.0000

EJBE 2021, 14(27)

Impact of COVID-19 on Stock Market and Gold Returns in India

Table 4. Granger Causality Test

Pairwise Granger Causality Tests Date: 07/31/20 Time: 13:53 Sample: 1 101
Lags: 2
Null Hypothesis:
NIFTY_RETURNS does not Granger Cause GOLD_RETURNS GOLD_RETURNS does not Granger
Cause NIFTY_RETURNS
Note: * denote for significant at 5% level.

Obs F-Statistic Prob. 98 0.19081 0.8266

3.62000* 0.0306
The Granger-Causality test results reveal that unidirectional causality running
from the gold
returns to the Nifty returns, whereas the reverse is not true. The granger
causality is further
supported by VAR results in Table 5 where we can see lagged gold returns cause
Nifty returns. These
findings inevitably suggest that the gold price contains some significant
information to forecast
Nifty return.
Table 5. VAR results
Vector Autoregression Estimates Date: 07/31/20 Time: 16:45 Sample (adjusted): 2 100
Included observations: 99 after adjustments Standard errors in ( ) & t-statistics
in [ ]

GOLD_RETURNS(-1)

NIFTY_RETURNS(-1)
GOLD RETURNS 0.089660
(0.10144)
[ 0.88386]
0.032056
(0.04996)
( 0.64163]
0.001749
(0.00144)
[ 1.21471]
NIFTY RETURNS 0.415162
(0.19953)
[ 2.08074]
-0.181036
(0.09827)
[-1.84228]
-0.003245
(0.00283)
[-1.14629]

R-squared 0.012440
Adj. R-squared -0.008134
Sum sq. resids 0.019243
S.E. equation 0.014158
F-statistic 0.604646
Log likelihood 282.5377
Akaike AIC -5.647226
Schwarz SC -5.568586
Mean dependent 0.001848
S.D. dependent 0.014101
Determinant resid covariance (dof adj.) Determinant resid covariance
Log likelihood
Akaike information criterion Schwarz criterion

EJBE 2021, 14(27)

0.073501
0.054199
0.074446
0.027847
3.807919
215.5688
-4.294319
-4.215679
-0.002092
0.028634
1.55E-07
1.46E-07
498.1094
-9.941604
-9.784324
Page 139

Sarika MAHAJAN & Priya MAHAJAN

After examining the dynamic relationship between gold and the nifty index, it is
imperative to
check the dependence of nifty returns on gold. So, further, we have applied the
ARMA model (2,2) to
see the impact of gold on the Nifty index and to see the impact of fear and panic
created by
lockdown due to COVID-19 using a dummy variable for the lockdown period, where (Dt)
takes a value
of 1 for the daily returns of March 21, 2020 to May 29, 2020 defined as lockdown
period otherwise
0.
Results in Table 5 indicate that Nifty index returns are greatly impacted by the
lockdown period
due to COVID-19. Whereas in the ARMA model (2,2), the impact of gold on the Nifty
index is not
significant. It is mandatory to check certain conditions while running ARMA
modeling. So, the
current study has applied the Breusch- Godfrey Serial Correlation LM Test to see
serial correlation
data and found no serial correlation in our data set (Table 7). But we found the
ARCH effect in our
data while running the ARMA model (Table 8). So, the results of the ARMA (2, 2)
model may be
spurious as the ARCH effect is there. And, it is very much established in
literature to go for
GARCH modeling when there is an ARCH effect in data.
Table 6. ARMA (2,2) Model with a dummy variable for Lockdown period
Dependent Variable: NIFTY RETURNS Method: Least Squares
Date: 07/31/20 Time: 17:31 Sample (adjusted): 3 100
Included observations: 98 after adjustments Convergence achieved after 32
iterations MA Backcast: 1
2

Variable
c
GOLD RETURNS DUMMY
AR(1)
AR(2)
MA(1)
MA(2)
R-squared
Adjusted R-squared
S.E. of regression Sum squared resid Log likelihood
F-statistic Prob(F-statistic)
Coefficient Std. Error t-Statistic
-0.030643 0.017193 -1.782274
0.129802 0.156187 0.831068
0.040962 0.011193 3.659512
1.324055 0.157875 8.386713
-0.347000 0.154928 -2.239745
-1.713632 0.108405 -15.80771
0.809364 0.111045 7.288589
0.152141 Mean dependent var 0.096238 S.D. dependent var 0.027360 Akaike info
criterion 0.068122
Schwarz criterion
217.2437 Hannan-Quinn criterion
2.721529 Durbin-Watson stat
0.017758
Prob.
0.0780
0.4081
0.0004
0.0000
0.0275
0.0000
0.0000
-0.002067
0.028780
-4.290688
-4.106048
-4.216005
1.992277

Inverted AR Roots Inverted MA Roots

.96
.86-.27i
.36
.86+.27i

To meet the objectives of this study, the GARCH model is used based on conditional
mean and
variance equations. The results of the GRACH (1,1) model, along with the dummy
variable for the
lockdown period, are presented in Table 9. The results of the

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Impact of COVID-19 on Stock Market and Gold Returns in India

mean equation of the GARCH model confirm that gold has a significant impact on the
Nifty return as
the coefficient of gold returns is negative and significant.
Table 7. Breusch-Godfrey Serial Correlation LM Test for ARMA (2,2) model
H : There is no serial correlation in data

F-statistic 0.021253 Prob. F(2,89)

Obs*R-squared 0.046074 Prob. Chi-Square(2)

Table 8. Heteroskedasticity Test: ARCH for ARMA (2,2) Model

F-statistic 10.05611 Prob. F(1,95)
Obs*R-squared 9.284967 Prob. Chi-Square(1)
0.9790
0.9772

0.0020
0.0023

Table 9. GARCH (1,1) Model with a dummy variable for lockdown period
due to COVID -19
Dependent Variable: NIFTY RETURNS
Method: ML- ARCH (Marquardt) - Normal distribution Date: 07/31/20 Time: 17:38
Sample (adjusted): 1 100
Included observations: 100 after adjustments Convergence achieved after 30
iterations Presample
variance: backcast (parameter = 0.7)
GARCH = C(3) + C(4)*RESID(-1)^2 + C(5)*GARCH(-1) + C(6)*DUMMY

Variable Coefficient Std. Error z-Statistic C 0.001391

0.001255
1.108774
GOLD_RETURNS -0.510401 0.125245 -4.075236
Variance Equation
Prob. 0.2675
0.0000

C 6.80E-06
RESID(-1)^2 0.389459
GARCH(-1) 0.724345
DUMMY -1.22E-05
R-squared -0.077396
Adjusted R-squared -0.088390
S.E. of regression 0.029741
Sum squared resid 0.086683
Log likelihood 251.4081
Durbin-Watson stat 2.178316
5.89E-06 1.154920
0.150111 2.594465
0.104759 6.914384
4.28E-05 -0.284150
Mean dependent var
S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criterion
0.2481
0.0095
0.0000
0.7763
-0.001989
0.028508
-4.908161
-4.751851
-4.844900

As far as the conditional variance equation is concerned, the study finds

parameters oi (ARCH) and
§j (GARCH) positive and significant in Table 10. It indicates that conditional
variance is
predominantly affected by lagged variance (volatility clustering), which implies
that previous
information shock significantly affects current returns. Volatility clustering
suggests that
movement in price variance once initiated tends to persist over the period and
steadily declines.
Large §j shows that shocks to conditional variance take a long time to die out.
Thus, volatility is
persistent. The last coefficient of this model is concerned with the recent
lockdown due to the
COVID-19 health crisis, which has a negative impact, but its effect is

EJBE 2021, 14(27) Page 1 41

Sarika MAHAJAN & Priya MAHAJAN

insignificant due to asymmetric information, which cannot be captured by the GARCH

model.
As significant asymmetry is observed in the returns of the Nifty index, thus it
would be more
informative if we examine the gold and Nifty returns relationship through EGARCH
(1,1) model to
take into account the impact of good and bad news on the volatility knowing the
fact that both
types of news have different kinds of effect on the market. The results of EGARCH
(1,1) are shown
in Table 10.
Table 10. EGARCH Model Estimates with a dummy variable for lockdown period due to
COVID-19
Dependent Variable: NIFTY RETURNS
Method: ML- ARCH (Marquardt) - Normal distribution Date: 07/31/20 Time: 17:36
Sample (adjusted): 1 100
Included observations: 100 after adjustments Convergence achieved after 20
iterations Presample
variance: backcast (parameter = 0.7)
LOG(GARCH) = C(3) + C(4)*ABS(RESID(-1)/@SQRT(GARCH(-1))) + C(5)
*RESID(-1)/@SQRT(GARCH(-1)) + C(6)*LOG(GARCH(-1)) + C(7)
*DUMMY

Variable
C
GOLD RETURNS

C(3)
C(4)
C(5)
C(6)
C(7)
R-squared
Adjusted R-squared
S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat
Coefficient Std. Error z-Statistic
-0.000420 0.001092 -0.384382
-0.463439 0.124038 -3.736273
Variance Equation
0.216955 6.53E-05 3324.930
-0.110146 6.17E-07 -178487.8
-0.226960 0.043879 -5.172467
1.008937 0.002329 433.2318
-0.135171 0.025557 -5.288957
-0.058925 Mean dependent var
-0.069730 S.D. dependent var 0.029485 Akaike info criterion 0.085197 Schwarz
criterion
265.2203 Hannan-Quinn criterion
2.207763
Prob. 0.7007
0.0002

0.0000
0.0000
0.0000
0.0000
0.0000
-0.001989
0.028508
-5.164405
-4.982043
-5.090600

The presence of the leverage effect can be seen in Table 10, which implies that
every price change
responds asymmetrically to the positive and negative news in the market. The
coefficient of gold
returns shows a significant negative impact on nifty return. The parameter C(4) is
statistically
significant, which supports the previous evidence of asymmetric distribution of
returns in
descriptive statistics. The significant C(5) parameter indicates the mean-
reverting behavior of
returns because the value of C(5) is negative, which implies that every price
change responds
asymmetrically to the positive and negative news in the market. Coefficient C(6), a
parameter of
lagged conditional volatility, is significant, which implies that the Indian

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Impact of COVID-19 on Stock Market and Gold Returns in India

market is informationally inefficient. Coefficient C(7), a parameter of lockdown

period dummy, is
statistically significant and negative, which implies that closure of activities of
service and
industrial sector because of lockdown by the central government in India to control
the spread of
COVID-19 have impacted volatility or increased volatility in Indian stock market.
This evidence confirms that the recent lockdown due to COVID-19 positively hit the
volatility of
stock return. The above discussion suggests increased volatility of the Indian
stock-return series
during the lockdown period. It might be due to the loss of confidence of domestic
investors in the
market because of uncertainty created by financial and health shock due to COVID-
19. And, this
uncertainty during lockdown due to COVID-19 has attracted investors again towards
gold investment,
which further increased demand and has pushed its rate to the higher side.
5. Conclusion
One of the major characteristics of safe-haven assets is that the return on these
assets should
have a zero or negative beta with stock market returns during turmoil periods.
Results obtained
from this study showed that gold had positive returns during the lockdown period
due to the
Coronavirus pandemic, indicating that they can be labeled as safe-haven assets, but
these returns
were not caused by stock markets' negative returns rather by other variables. So,
we can say here
that panic and fear created in lockdown have directed investors towards the gold
market. Also, we
can see from the results of linear Granger causality and VAR tests that lagged gold
returns cause
Nifty returns. These findings inevitably suggest that the gold price contains some
significant
information to forecast Nifty return.
This study offers novel empirical evidence on the relationship between Gold and
Nifty index return
during lockdown due to COVID-19 related news. Results based on GARCH and E-GARCH
models indicate a
significant negative impact of gold on nifty returns during the sample period. The
results also
indicate investors' perception of gold as a safe-haven asset during periods of
elevated
uncertainty.
Dummy variable used in ARMA and EGARCH models to examine the impact of lockdown due
to pandemic on
stock market return and volatility is significant, thereby shows how health shock
has created
financial turmoil in the market and closure of activities of service and industrial
sector because
of lockdown by the central government in India to control the spread of COVID-19
have increased
volatility in Indian stock market.
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